OPEC + is expected to stick to its current production agreement for now, but behind the scenes, oil-producing countries could plan for a day when Russia’s contribution to global oil supplies could be significantly reduced.
The European Union’s move to ban most Russian oil and impose new sanctions on shipping insurance could seriously hamper Russia’s ability to export crude oil. EU leaders agreed this week on an embargo on oil and petroleum products, with a temporary exemption for some of the oil delivered by pipeline.
“If they ban insurance of tankers carrying Russian oil, it will really worsen the quarrel over barrels and the summer will certainly be stormy,” said Daniel Yergin, vice president of S&P Global. “If you don’t have insurance, most reputable tankers won’t sail because the risks are huge.”
Most tanker insurance is written by London-based insurers. “Insurance doesn’t get the same attention as barrels of oil, but insurance is important,” Yergin said.
The OPEC logo in the photo before an informal meeting between members of the Organization of the Petroleum Exporting Countries (OPEC) in Algeria, Algeria.
Ramsey Budina Reuters
This prospect of a greater loss of Russian oil from the market and the potential for sharply higher and volatile prices outweighs OPEC members who have been asked by Western countries to supply more crude oil.
Ultimately, the cartel may increase the amount of oil on the market as Russian oil is reduced, but that is unlikely to be part of an OPEC announcement Thursday.
“I think they will try to manage it elegantly with the Russians,” said Helima Croft, head of global raw materials strategy at RBC. “I do not think that the OPEC leadership wants to humiliate Russia at the moment. I think they’re trying to thread the needle slowly. They are committed to the market and want to get a reset with the United States. “
Croft said there were only four months left under the current agreement that OPEC + was expected to return to market the expected 432,000 barrels a day on Thursday.
She said that even if OPEC changed its agreement earlier, it was unclear how much relief would be provided, with limited spare capacity and no end to the war in Ukraine.
However, the strategist said that there is potential for Saudi Arabia to “cancel” the agreement before the official date as part of a “big deal” with the United States.
Relations between the kingdom and President Joe Biden’s White House have been strained. Biden has a chance to visit the country and meet with Saudi Crown Prince Mohammed bin Salman when the president visits Israel in late June.
“Since February, we believe there is a deal that needs to be reached if Washington can address the kingdom’s major security concerns and strategic concerns,” Croft said. “During our visits to the kingdom this year, officials there said they were looking for a new partnership agreement with the United States and that energy would be part of this broader bilateral conversation.
Croft said that a concern for Saudi Arabia was the US negotiations for a new nuclear deal with Iran, but the chances of a deal now seem slim and that could help relations with Riyadh.
“We think there is momentum to increase production in Saudi Arabia over the summer,” Croft said. “There were a lot of diplomatic movements behind the scenes.”
The EU ban must be introduced in stages and cover two thirds of European imports from Russia. The ban could eventually limit 90% of Russian imports, based on promises from Germany and Poland to suspend imports from the northern part of the Druzhba pipeline.
According to some estimates, previous sanctions have already affected about half of Russia’s exports, and broader sanctions could further hamper them, leaving global oil supplies very limited. Analysts say oil could test the March high of $ 130.50 a barrel for West Texas Intermediate crude. WTI futures settled at $ 115.26 a barrel on Wednesday.
The EU’s decision to also block insurers from covering Russian oil supplies came as a surprise to some market observers. The move will affect tankers traveling the world and could undermine Russia’s efforts to sell its oil in Asia to countries including India and China.
“This, combined with the reopening in China, only increases supply pressures,” Yergin said. “The combination of sanctions, lack of insurance and China’s recovery means a very, very, very tight oil market and a struggle for supplies.
John Kildaff, a partner at Again Capital, said Russian oil could be excluded from the market but not completely eliminated.
“We are definitely in a difficult situation at the moment, but the fact with all this news and we have not yet returned to the top is indicative,” he said. “This is an art form of circumvention of sanctions, and Iran has written a book about it. India and China will continue to be buyers. There will be transfers from ship to ship in the dark of night. There is very little you can do about it.
Partly because of Russia’s ability to export, oil prices may not rise above their March highs. China is also a wild card, Kildaff said, and demand may not be as high as expected once it reopens its economy. Meanwhile, OPEC also forecasts a surplus of 1.5 million barrels per day for the balance of the year, he added.
The Wall Street Journal reported that some OPEC members are investigating the suspension of Russia’s involvement in the production agreement, as sanctions affect its ability to pump more oil. But analysts do not expect to see signs of this at this week’s meeting.
“I think the group is also trying to differentiate between politics and economics. And the economy dictates that if prices continue to rise, you will seriously damage demand at this stage, “said Francisco Blanche, head of raw materials and derivatives strategy at Bank of America. “We already had record prices for diesel, record prices for petrol, and now we are waiting for record prices for raw crude.”
But Blanche said OPEC could eventually have a new production plan that does not rely on Russian crude oil.
Saudi Arabia is the only country with a free capacity to produce and export more oil.
“What the group is looking for is how to prevent a shortage of raw product, which ultimately has the opposite effect on the group itself. I think I think that if we don’t do something here, it’s likely to hit us back,” Blanche said. . The question is how Russia reacts to this.
Analysts say there is a risk that prices will jump dramatically if Russia takes revenge and cuts off Europe sooner than it plans to ban Russian oil.
“The thing we need to watch is whether we get Russian weapons for export,” Croft said. This could create a scenario in which oil could jump, even reaching some estimates of $ 185 per barrel.
As one of the world’s three largest producers, Russia exported about 5 million barrels a day of crude oil and another 2.5 million barrels of pre-war refined products to Ukraine. OPEC cannot cover all these losses.
When Iranian oil was sanctioned, Saudi Arabia was able to make up for lost barrels, Blanche said. “I think the point was that the Saudis were much more involved in the process then,” he said. As Russia is a leading player in the OPEC + partnership, “this is a much more sensitive topic.”
Kildaff said there could be more backstage tensions between some OPEC members and Russia this week than expected.
Saudi Arabia and Russia are likely to maintain close ties even if US relations with the kingdom improve, but other members may be more interested in ending Russia’s role sooner, he said.
“The knives will certainly come out for Russia from some of the OPEC + members. This has all the elements of a Greek tragedy,” Kildaff said.
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